Troube ahead for Youbet.com deal?

The Boardroom celebrations on the agreement by US horseracing company Churchill Downs to buy the online race gambling company Youbet.com could be premature, according to reports in the Los Angeles Business Journal this week.
The publication reveals that at least five separate shareholders of YouBet have filed lawsuits in Los Angeles Superior Court alleging that Churchill Downs is underpaying for their company.
Two weeks ago Churchill Downs announced it had agreen to acquire YouBet for $127 million in stock and cash, or about $2.84 a share. The offer was probably based on theYoubet share price immediately prior to the announcement, which had sunk to $2.22 a share.
However, the litigants claim that Youbet’s stock was trading earlier in the year – in August – at more than $3.70, and that at least one analyst has projected it could hit $4 a share, indicating that Youbet directors could have achieved a substantially better deal. The plaintiffs are therefore seeking an unspecified amount of damages and a possible halt to the merger.
The plaintiffs, all individual shareholders of Youbet, are identified as Wayne Witkowski, George Bullmore, Peter McManus, Charles Seeger and Zahava Rosenfeld, and the actions claim that Youbet executives did not uphold their fiduciary duty to shareholders because they entered an agreement that undervalued the company.
Mark Argento, an analyst at Craig Hallum Capital Group LLC in Minneapolis who covers Youbet, told the Journal that Churchill Downs wasn’t likely to raise its offer because of the stock involved in the deal: If Churchill Downs offers more stock, the deal could become subject to approval by Churchill Downs shareholders. And they might be reluctant to grant an OK because putting more shares into the deal could dilute the company’s stock.
“Was the price too low? We would have liked to see them get more,” Argento said. “But Churchill Downs wanted to keep the dilution of its stock down, and that capped its ability to offer more.”
Churchill Downs could skirt the dilution issue by offering more cash. But that’s unlikely because the company had only about $16.6 million in cash and cash equivalents on hand at the end of the previous quarter.
The merger has been approved by the boards of both Youbet and Churchill Downs, and is awaiting approval of Youbet shareholders and federal regulators.

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